Tax relief on car ownership
Commercial business owners generally upgrade their car every couple of years and usually this prompts some thought around the most tax effective way to, firstly, purchase the car and secondly run and maintain the car. This involves a decision around whether the car is better off owned by the company or the individual. A bespoke calculation is always advisable as various factors apply. However, understanding the general rules is a good starting point to maximising tax relief.
How it works for sole traders and partnerships
Many commercial business owners start their business life as either a sole trader or a partnership. When it comes to car ownership, it is more straightforward than when trading as a limited company, in so much that the initial cost of the vehicle and all the running costs can be included within the business accounts.
It’s not to say 100% is deductible for tax. If there is any private use of the car then a percentage is disallowed for tax relief within the personal tax return. And there usually is some personal use, as typically journeys between home and work are considered private. Also, worth noting is the entire cost of the car is not allowable within one year; it is apportioned over what is considered the useful life of the asset.
How it works for limited companies
There are two typical options for those commercial businesses trading under a limited company status.
1) The car is owned by the limited company and allows the employee / director use of the car for their own purposes, as well as for work.
2) The director owns the car personally.
Option 1: Company car
Here, tax relief can be claimed by the limited company on all related running costs, including:
• Repairs and maintenance
• Car tax
• Breakdown cover
• Lease payments, or interest on hire purchase / loan payments
The company can also claim the costs of fuel, however other tax implications apply so it is rarely worth it.
There is no personal element disallowed for tax within the company, however, as the employee / director has use of the vehicle for their private usage, there is tax accounted for via their personal tax return.
The personal tax for the director or employee is based on the carbon emissions of the car and the original list price.
Figurit have a useful tool to calculate the personal car tax based on your personal situation. Call us to work out some figures for you.
Typically, the higher the carbon emmissions, the higher the personal tax.
Could you end up paying more tax though?
Especially relevant if you are a sole director, the situation of running a car within your own limited company, could result in you paying more personal tax than the tax relief gained in the company.
It is also worth noting that the way in which the tax is structured for company car owners is becoming less attractive as an option.
Carbon emissions – the broad calculation
Less than 95g/kg
For what are considered “low emission cars” it usually works out tax effective for the company to own the car. The director pays the tax on the personal use and the tax effect should be positive overall.
More than 95g/kg
With carbon emissions over 95g/kg it usually works out better for the director to own the car personally. This takes us back to Option 2.
Option 2: Private ownership
When the car is owned privately, the director is limited to making a claim for the business mileage, which current rates stand at:
• 45p for 10,000 miles
• 25p for miles thereafter
The income transferred to the director is tax free, as it technically just covers some of the running costs already outlaid. The company can claim the tax relief as a legitimate business expense.
As before, journeys between home and work are not allowable.
Leasing versus cash payment
A common question asked in conjunction with purchasing a new car is whether it is better to buy the car “outright” or on finance.
The decision to lease a car or buy a car is not related to tax savings.
It is a cash flow decision based on whether you have funds to pay for the car or if it is more effective for your business to spread the costs over a number of months or years. Just remember, paying for anything on finance means more cost in the long-term, with interest and fees.
Figurit can help you calculate the best method of ownership for you and your business taking into account all factors. One of our specialist commercial team will give you a prompt answer to guide you when making important financial decisions.
020 7376 9333